Inflation Lesson

[imagep]

Where is the proof that we would not grow if we outlawed the fraud that is fractional reserve banking?

There would be less capital available, the cost of that capital would be higher, and the cost of maintaining a demand deposit bank account would be higher.

How would any of this benefit our economy?

 

[Missed AB]

I already told you. Time deposits, or at least let people know that if you are getting interest on a demand deposit that you can't get all of it at once. A 100% reserve ratio would not allow this "re-loaning" to occur.

I misunderstood what you wrote originally. Time deposits such as CD's do have this acknowledgement. Savings deposits do not - and maybe they should - but there is still the risk that since there are multiple claims on the same dollar, that dollar will never be found. The bank must first get a dollar to give a dollar.

100% reserve does not allow for ANY loaning. I deposit 100 dollars to the bank. The bank must keep 100 dollars in reserve.

Besides, the problem is in people thinking that they can get all of their money, but not all of those expectations can at the same time be true. The true problem lies there. Correct that and the problem is pretty much gone.

The problem as I see it lies with loan rates not reflecting the true risk valuation. The reason the banks can get away with this is because the deposits are insured by the FDIC.

If loans were originated with appropriate risk then the bank would have more income for when the loans eventually default. The liquidity crisis they banks had was proof that they did not value the risk properly. The returns from payments were lower than the defalted loans. Low rates that do not reflect risk in lending is the problem. Risk related APR's keep people out of the loan market who should not be in the loan market, and provides coverage for when the loan tanks to that higher risk borrower.

 

[nonpareil]

But who should be concerned? Residents of the country, first and foremost, says Bivens. A massive external debt could possibly trigger an exchange rate devaluation, especially if a country relies heavily on imports, creating a situation where money will be more difficult to tax in the future, debts will be more difficult to repay with less valuable currency and issues of fiscal sustainability arise.

News Headlines


The US has spent $3.5 trillion in fiscal 2010, while taking in only $2.2 trillion in tax receipts, creating a $1.3 trillion budget deficit, about the size of Canada’s economy, or about 10% of GDP. That is the highest ratio of debt to GDP since World War II. The White Househas proposed to spend $3.8 trillion for fiscal 2011. The federal deficit is at $13.9 trillion, approaching the size of the US economy....Moody’s said the nation's debt rating was “not under immediate threat,” although it did say the rating could be downgraded in 2013 if the fiscal position of the US did not improve....If the US lost its Triple-A rating, the country would have to spend more to borrow, creating further financial pain

Does the US Deserve its Triple-A? - FoxBusiness.com


Tracing the history of the national debt back through our history, the CBO finds that the national debt did not exceed 50% of GDP, even when the country was fighting the Civil War, the First World War or any other war except World War II. As you can see in the chart, the national debt declined sharply after World War II as the nation began paying off its wartime debt when the conflict was over. http://forecastsandtrends.com/ads/ftarticle.php?ftid=697


Beyond those gradual consequences, a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors’ confidence declined, giving legislators advance warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. But as other countries’ experiences show, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply.

Congressional Budget Office - Federal Debt and the Risk of a Fiscal Crisis

Those articles do not come anywhere near to explaining this: Today, debt ratios held by countries is having an effect on the value of that countries currency more so than any other time in recent history.

To explain that there would need to be some kind of analysis on the correlation between debt and currency value over time for different countries. These articles only talk about the growing debt.

 

[nonpareil]

I misunderstood what you wrote originally. Time deposits such as CD's do have this acknowledgement. Savings deposits do not - and maybe they should - but there is still the risk that since there are multiple claims on the same dollar, that dollar will never be found. The bank must first get a dollar to give a dollar.

100% reserve does not allow for ANY loaning. I deposit 100 dollars to the bank. The bank must keep 100 dollars in reserve.


The problem as I see it lies with loan rates not reflecting the true risk valuation. The reason the banks can get away with this is because the deposits are insured by the FDIC.

If loans were originated with appropriate risk then the bank would have more income for when the loans eventually default. The liquidity crisis they banks had was proof that they did not value the risk properly. The returns from payments were lower than the defalted loans. Low rates that do not reflect risk in lending is the problem. Risk related APR's keep people out of the loan market who should not be in the loan market, and provides coverage for when the loan tanks to that higher risk borrower.

How do deposit insurance stop bank from lending at a rate they feel would compensate them for the risk they take? That's a bogus claim if I ever see one. In fact the problem for the last two years is that banks are not lending at the previous level even though they can borrow at such low rates - banks have become more risk-averse. The problem is not with the deposit, but with bank's estimation of risk. During the boom, banks underestimate the risk and loan at too low a rate, now that there is a bust, banks go to the other extreme and over-estimate the risk causing them to become too wary of lending.

 

[Moot]

Yes, it is a "racket". In very much the same way that the insurance industry and the hotel industry, and the printing industry, and the grocery store industry, and the clothing industry, and the construction industries are rackets. All profitable industries are "rackets" to someone. Thank God for rackets or else none of us would have jobs.

I don't have a problem with fractional reserve banking as long as it's regulated. So thank God for regulations....or what's left of them or none of us would have jobs or money or even freedom.

Usury - Wikipedia, the free encyclopedia

 

[Missed AB]

The problem is not with the deposit, but with bank's estimation of risk....

Are you trying to find someone to argue with, or do you not read my posts that you quoted? I wrote:The problem as I see it lies with loan rates not reflecting the true risk valuation.

banks have become more risk-averse.

You think 4% 30 year fixed mortgages is a fair risk evaluation in today's world with 20% down and still no bottom to property prices found? Add an acceleration of foreclosures? Just wondering. 5 years ago 30y fixed was about 5 - 6%. You really think we are in a beter place now?

In fact the problem for the last two years is that banks are not lending at the previous level even though they can borrow at such low rates

There are fewer people who meet the debt to income ratios today then 3 years ago.

During the boom, banks underestimate the risk and loan at too low a rate, now that there is a bust, banks go to the other extreme and over-estimate the risk causing them to become too wary of lending.

It's not just the amount they lend, it's the return on the investment. The APR's were and still are too low. Higher APR's lower the amount one can borrow and increases cash flow back to the bank and minimizes losses when there is a default.

In fact the problem for the last two years is that banks are not lending at the previous level even though they can borrow at such low rates

That has to do with the economic cycle. First people are not looking to take loans like they were 5 years ago. People have had asset depreciation so they have less collateral to get the loan. Paychecks have become smaller for many people so they have higher debt to income ratios. Unemployment is 10% knocking out a few more people from the loan pool "who probably really need the loan". Also banks have a lot of loans on their books which are defaulting. For each property default, the bank needs to pay taxes, and take a loss on the resale meaning some portion of the loan is just to boost reserve.

Furthermore people who have exercised the right to accumulate debt over the past decade are starting to pay it off - not take on new debt. Other people who are hurting due to the unempolyment, underemployment are making withdrawals to keep up with payments, again depleting the banks reserve funds which may require the bank to take on more loans to remain solvant. Many banks are looking to just survive, forget about growing.

 

[Missed AB]

Those articles do not come anywhere near to explaining this: Today, debt ratios held by countries is having an effect on the value of that countries currency more so than any other time in recent history.

To explain that there would need to be some kind of analysis on the correlation between debt and currency value over time for different countries. These articles only talk about the growing debt.

If you don't understand the correlation between debt, debt repayment, inflation, and currency value then I suggest you use google... Maybe you can show me where I have errored in my thinking.

 

[phattonez]

I misunderstood what you wrote originally. Time deposits such as CD's do have this acknowledgement. Savings deposits do not - and maybe they should - but there is still the risk that since there are multiple claims on the same dollar, that dollar will never be found. The bank must first get a dollar to give a dollar.

100% reserve does not allow for ANY loaning. I deposit 100 dollars to the bank. The bank must keep 100 dollars in reserve.

A 100% reserve requirement does not make time deposits illegal.

The problem as I see it lies with loan rates not reflecting the true risk valuation. The reason the banks can get away with this is because the deposits are insured by the FDIC.

And because of the discount rate being so low.

If loans were originated with appropriate risk then the bank would have more income for when the loans eventually default. The liquidity crisis they banks had was proof that they did not value the risk properly. The returns from payments were lower than the defalted loans. Low rates that do not reflect risk in lending is the problem. Risk related APR's keep people out of the loan market who should not be in the loan market, and provides coverage for when the loan tanks to that higher risk borrower.

In other words, we're not pricing the use of capital appropriately.

 

[phattonez]

It's only fraud if it is illegal or if someone is harmed by it. I would not agree that the fractional reserve banking system is fraud. Risky - yes. But all industries have a certain amount of risk. There is little profit without risk.

Bank runs have happened, so yes, people do get harmed.

As a user of a checking account I am aware that it is possible that my bank may not be able to honor my account. But in 25+ years of having a checking account that has never happened. Not even when my bank failed a couple of months ago. I never lost access to my money. I am aware of the risk, but the risk is so low that it is insignificant. My money is guaranteed by the FDIC. There is risk with every transaction, everything I purchase, everything I sell, every time I drive my car or eat a meal. I accept a certain amount of risk every time I take a breath of air.

FDIC insures it. It doesn't mean that the bank is acting responsibly.

We are compensated for the use of our money, either interest or low fee banking accounts or simply convienience. There is nothing wrong with us being compensated for allowing the bank to utilize our short term or long term cash when we arnt using it. It's really a very efficent system where almost nothing goes to waste, and it increases the velocity of money. Imagine how profitable and efficient the housing industry would be if every single housing unit was being utilized every single day. Or if every single car was used every day. Most of us have cars that sit in a parking lot most of the day - imagine how wealthy we would be if we had the ability to effeciently rent them out when we were not using them.

Time deposits. I'm not calling for the complete abolition of loans.

 

[phattonez]

There would be less capital available, the cost of that capital would be higher, and the cost of maintaining a demand deposit bank account would be higher.

How would any of this benefit our economy?

We would be pushed into time deposits and other accounts so that we know the risk and act in accordance with that risk. Right now there is a risk when we put money into a savings account but no one realizes it.